News and Guidance for the 2023 Tax Season

Understanding intricate tax laws that are forever evolving can be very challenging. Even though it’s no walk in the park, it’s vital to account for potential tax impacts when making financial decisions.

The Internal Revenue Service (IRS) annually revises the standard deduction and income tax brackets to account for inflation. In 2022, the inflation rate rose to it’s highest level in 40 years, prompting a 7% increase for 2023, the biggest since these adjustments began in 1985. The standard deduction for single filers in 2023 has gone up by $900 to $13,850, and for joint filers, it’s up by $1,800 to $27,700.

The deadline to file 2023 federal income tax returns is April 15, 2024, but it’s pushed to April 17 in Maine and Massachusetts due to local holidays. Although the 2024 tax year is already in progress, there might still be enough time to implement measures that could reduce your 2023 tax liability.

Grasping the Concept of “Marginal” Tax Rates

Tax rates in the U.S. climb at progressively higher income levels or brackets. If your taxable income increases and pushes you into a higher bracket, the resulting tax hike may not be as severe as you initially thought. For instance, if you and your spouse jointly file for 2023 with a taxable income of $110,000, you fall into the 22% tax bracket. However, this rate is only applicable to the portion of your income exceeding $94,300.

The value of some deductions also hinges on where your income falls within these tax brackets. Using the same example, a deduction of $10,000 reduces your income from $110,000 to $100,000, potentially decreasing your tax liability by $2,200 (22% of $10,000). For a $20,000 deduction, the amount that falls into the 22% and 12% brackets must be calculated separately: 22% of $15,700 plus 12% of $4,300 equals $3,970.

While understanding your marginal rate is beneficial, knowing your effective tax rate — the average rate at which your income is taxed, determined by dividing your total taxes by taxable income — might provide a better measure of your tax liability.

Claiming Large Casualty Losses

In 2023, the U.S. experienced a record number of billion-dollar disasters, including wildfires, tornadoes, storms, floods, and landslides. If you suffered a disaster-related loss that exceeded 10% of your adjusted gross income (AGI) plus $100, you might qualify for an itemized deduction on your federal income tax return. This generally applies to substantial losses that are uninsured or subject to high deductibles. From 2018 to 2025, personal casualty losses can only be deducted if they’re linked to a federally declared disaster.

Casualty loss rules can be quite complex. So, if you’ve suffered a significant loss, it could be beneficial to seek advice from a tax professional.

Seeking an Extension

If you’re unable to meet the filing deadline, you can request and receive an automatic six-month extension using IRS Form 4868. Failure to do so could result in penalties if you owe taxes. The extension must be filed by the original due date, which is April 15, 2024, for most individuals. Extended returns are due by October 15, 2024.

Remember, an extension to file your tax return doesn’t mean you can delay tax payments. Estimate your tax liability and make the expected payment by the original due date. Any unpaid taxes will attract interest and potentially penalties.

Paying Yourself Instead

Lower your tax bill and boost your savings by making deductible contributions to a traditional IRA or an existing qualified health savings account (HSA) for 2023. You can do this until the tax deadline of April 15, 2024, if eligible.

The IRA contribution limit for 2023 is $6,500, which increases to $7,000 in 2024. If you’re 50 years or older, you’re allowed to make an extra $1,000 catch-up contribution. Deductibility of these contributions is phased out at higher income levels if you or your spouse has a workplace retirement plan.

If you had an HSA-eligible health plan in 2023, you could contribute up to $3,850 for individual coverage or $7,750 for family coverage. For 2024, the limits are $4,150 and $8,300, respectively. Each eligible spouse aged 55 or older (but not on Medicare) can contribute an extra $1,000.

Avoiding Scams and Costly Errors

Tax season is a peak time for identity thieves who may file a fraudulent tax return in your name, delaying any refund you’re owed. Or, you might receive intimidating calls or emails from fraudsters pretending to be the IRS and demanding payment. Keep in mind that the IRS never initiates contact via email to request personal or financial information, and they will never call about taxes owed without first sending a bill by mail. If you suspect you owe taxes, reach out directly to the IRS at irs.gov.

In recent times, the IRS has scrutinized less than half a percent of all individual tax returns. However, the agency has voiced its intention to bolster audits on affluent taxpayers and large corporations in an effort to recoup missing tax revenue. Regardless of your income bracket, it’s likely you’d prefer to avoid drawing attention to your tax return. Be sure to thoroughly review any manual calculations. If you’re using a tax software, confirm that all entries, including the math and other relevant data, are correct. Ensure you’ve included all income and exercise prudent judgment when claiming deductions. Keep a record of all necessary documentation.

Lastly, if you’re uncertain about your personal situation or feel uneasy preparing your own tax return, it might be worth considering the services of a seasoned tax professional. Let us know when you’re speaking with us as we often have important input to share with your tax professional.

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